Is it true that when the market can only go up or down in the long run, using the most popular 1:1 risk -reward ratio will help at least half of the market participants succeed in a trade?
Unfortunately no.
There is a widespread belief that the trader's worst enemy is himself, and that the root of most problems is the human factor. In short, the main reason why Forex traders lose money is quite obvious: it is the traders themselves.
There are such figures among traders: 80% of traders lose 80% of their capital in 2 months from the start of trading, and only 20% of traders constantly make a profit in the foreign exchange market. Why is this happening and why only a few manage to be successful in Forex ?
Financial trading, including in the foreign exchange markets, requires long-term and detailed planning at several levels. It is impossible to start trading without knowing the basics of how the market works and constantly analyzing the rapidly changing market environment.
If you are interested in investing and trading, read the recommendations below to understand how not to lose money in Forex.
Why people lose in Forex depends on many factors. Let's consider this in more detail.
Forex Mistakes - Lack of theoretical knowledge
The most popular mistake among beginner Forex traders is trading without knowledge, without understanding how the foreign exchange market works. Many traders arrogantly believe that the foreign exchange market is very simple and can be done without prior training.
But, alas, it is not. In any profession, you need to learn, and in Forex, the mistakes of beginners are very expensive.
Forex beginners' mistakes start with the fact that they underestimate the importance of knowledge. They do not like to read books or articles and prefer to learn by trial and error on demo accounts.
But if you look at the biographies or interviews of the most successful Forex traders, you will see that they studied for years before they started trading, and that is how they made their fortune.
Perhaps people are so light-hearted about currency trading because of the availability of the Forex market. Having understood how the terminal works, a novice trader confidently starts trading, sometimes even on a real account.
And what does it lead to? That's right, at a loss. In this article, we will tell you what are the most serious mistakes in the Forex market and how to avoid them.
The most important thing is to learn. Absorb knowledge as much as possible. We strongly recommend that you read the classic literature on the foreign exchange market:
But if you have excuses, such as that you don't have time for that, then you shouldn't waste your time trading either!
Forex Trader Mistakes - Lack of a Trading Plan
Every business needs a plan. The same is true with Forex trading. Without a plan, you will constantly go astray, it will be difficult for you to understand where you need to go.
When listing the mistakes of Forex traders, one cannot ignore trading without a plan. At the same time, traders who are too lazy to create a trading plan are most often too lazy to keep at least some kind of reporting and analyze their mistakes when trading on the Forex market.
A trading plan is a set of specific rules that, together with a strategy, tell you how you should manage your capital. It can also specify certain restrictions, such as prohibiting the use of trend-following strategies during the summer.
The main point is that these rules are clearly articulated and you strictly follow them. In doing so, you need to keep a record of your actions so that you can later analyze them and improve your trading.
This skill - keeping records, just distinguishes professionals from beginners . So try to work it out for yourself.
Forex Mistakes - Wrong Money Management
Forex is a highly volatile market, so the situation on it can change dramatically in a matter of minutes. And given the fact that many brokers offer leverage that traders are happy to use, such large changes in the foreign exchange market can be costly. Another big mistake in Forex trading is that traders do not discipline themselves and frivolously manage credit resources.
Before you start trading, you should ask yourself a few questions:
- Will I have the means to live if I lose all the capital invested?
- How much of my capital can I lose on one position?
- How many positions can I keep open at the same time?
- What proportion of winning and losing trades does my trading strategy allow ?
What is the optimal risk/reward ratio for me?
You must answer the first question with an unequivocal yes. Neither in the forex market, nor in any other market, should you risk an amount that you cannot afford to lose.
We are not saying that you will definitely lose them, but you should calmly consider the amount that you can invest in trading, and this cannot be your last money. This is the only way you can trade with a cool mind, sticking to your strategy.
The answer to the second question may be individual for everyone. But there is one general recommendation - you should not invest more than 1% of the total amount of your deposit in one transaction, unless, of course, your strategy provides otherwise.
As for the third question - the number of open positions, here again it all comes down to calculating the amount that you invest in these positions. Limit trading to no more than 5% of your total capital.
As for the rest of the questions - here you can decide for yourself. These numbers should reflect your trading strategy.
For example, trend-following strategies may only be profitable for a short time—until the trend changes. The chances of making a profit from trading other strategies may be higher, but sometimes the amount of profit that they can bring is not as great as we would like.
Forex Mistakes - Trading Addiction
Currency trading is a very exciting activity. Newbie traders are especially fond of it. They most often choose scalping or intraday trading, that is, short-term trading.
It is characterized by a minimum of analysis and a quick reaction. Well, there are still high risks. If you have recently discovered Forex, we advise you to study on daily charts, while constantly replenishing your theoretical baggage.
Long-term trading requires more competent and disciplined money management. Therefore, long-term traders must adhere to the 1% rule, the only way they can calmly look at the daily fluctuations of 100-150 pips that happen to some pairs during the week.
Long-term trading has one important plus - you do not need to sit in front of the monitor all day. Your participation will be needed only once a day - during the closing of the newly formed candle.
Constant learning, daily analysis of your trading, as well as patience and consistency will help you become a successful trader. Ignoring these aspects is the biggest mistake a Forex trader can make.
The main reasons for losses in Forex - what do traders' mistakes lead to
If you are interested in investing and trading, read the recommendations below to understand how not to lose money in Forex.
So why do people lose in Forex? Why do the most common mistakes of Forex and stock market traders occur?
Overtrading as a Reason Why Forex Errors Occur
Mistakes in the Forex trading environment often cause overtrading - trading too often or over-trading is the most common reason why traders lose money. Overtrading can be caused by unreasonably high profit targets, trading addiction, or undercapitalization.
We will omit the concept of inflated profit expectations for now, as it will be discussed below. To begin with, we will deal with the concept of thin capitalization.
Most traders know that it takes money to make money. One of the most important advantages of Forex is the ability to open an account with leverage.
This means that even traders with limited start-up capital can make significant profits (or suffer significant losses) by speculating on the prices of financial assets.
Whether a substantial investment base is achieved through high leverage or a large initial investment, it is not as important as ensuring that risk is strategically sound.
The key to it is to guarantee a sufficient investment base. That is, the required account balance significantly increases a trader's chances for long-term profits, and also reduces the psychological pressure that accompanies trading.
As a result, traders risk a smaller portion of their capital per trade, while accumulating significant profits.
So, how much capital is needed to trade Forex? Here you will learn how to stop losing money in Forex trading due to improper account management.
The minimum size of a trading position that any broker can provide is 0.01 lots . This volume is also known as a micro lot and is equal to 1,000 units of the base currency being traded.
It goes without saying that a small trade size is not the only means of limiting risk. Both novice and experienced traders should carefully consider stop loss placement As a general rule of thumb, novice traders should not risk more than one percent of their capital per trade.
In the case of novice traders, a deal involving a larger share of capital increases the likelihood of significant losses, that is, this is another reason why they lose money in Forex and the stock market.
Ignoring Market Conditions and Trader Mistakes
The assumption that one proven strategy is enough to make an infinite number of winning trades is another reason why Forex traders lose money.
Markets are not static. If they were static, trading would be impossible. Due to the fact that the markets are constantly changing, a trader needs to develop the ability to track these changes and adapt to any possible situation.
The good news is that these changes represent not only new risks, but also new trading opportunities. A skilled trader takes change into account rather than being afraid of it.
Among other things, a trader must become familiar with the methods of observing volatility by following the latest financial news, as well as being able to distinguish range and trend conditions in the market.
Market volatility can have a huge impact on how a trade is conducted. Traders should be aware that volatility can be distributed over different time frames: hourly, daily, monthly or yearly volatility.
Many trading strategies can be classified as dependent on volatility, less effective in unpredictable periods. For this reason, a trader must always make sure that the strategy he uses does not contradict the volatility prevailing in the prevailing market conditions.
Financial news releases are also important in tracking the situation, even if the chosen strategy is not based on fundamental analysis indicators .
Monetary policy decisions, such as changes in interest rates, or sudden economic data on unemployment or consumer confidence can change the mood in the trading community.
As the market reacts to these events, the impact on the supply and demand of the respective currencies is inevitable.
In conclusion, the inability to distinguish between market range and trend conditions often leads to the use of the wrong trading tools at the wrong time.
Poor Risk Management and Trader Mistakes
Why do they lose in Forex? Due to improper risk management, a trader can quickly lose his money.
Equipping trading platforms with automatic Take Profit and Stop Loss mechanisms is not accidental. Skillful management of them will significantly increase the chances of a trader to succeed.
Traders need to be aware not only of their existence, but also of how to apply them appropriately according to predicted levels of market volatility for the period and duration of the trade.
It should be remembered that "Stop Loss Too Low" may liquidate what could otherwise be a profitable position. At the same time, "Take Profit Too High" may not be reached due to lack of volatility.
With proper risk management, special attention should be paid to the ratio of risk and reward.
This is a set of measurements that help traders plan the amount of profit in the event of an expected course of trade, or the amount of loss, in case of its deviation. Consider an example.
In case your Take Profit is set to 100 pips and Stop Loss to 50 pips, the risk/reward ratio is 2:1.
It also means at least one breakeven trade out of three if they are profitable. Traders should always check these two pairs to make sure they match their profit targets.
Mistakes in Forex due to excessive requirements
There are two types of traders who come to the Forex market. The first ones come to Forex for the best trading conditions, or just to diversify their investments.
Others are traders who have never before taken part in trading in the financial markets. It is very obvious that the first group is striving to achieve much more success, thanks to their experience.
They know the answers to questions newbies ask, such as "Why do Forex traders fail?" or "How to lose money in Forex." Experienced traders tend to have realistic profit expectations.
This mindset means they refrain from chasing the price and modify the trading rules of their own strategy, which is rarely profitable.
Realistic expectations also ease the psychological pressure that comes with trading. Emotions can overwhelm some inexperienced traders during a losing trade, leading to a series of yet another bad decision.
It is important for novice traders to remember that Forex is not a get-rich-quick scheme. As with any business or professional career, there will be ups and downs, along with risks and losses.
By minimizing the impact of the market on a single trade, a trader can have peace of mind that one losing trade will not jeopardize overall profitability in the long run.
How to Avoid Forex Losses and Make Forex Mistakes
You need to understand that patience and constancy are your allies. Traders don't need to make a small fortune in one or two big trades. This only exacerbates the trader's addictions and can lead to significant losses over time.
Achieving positive results by making small trades over many months and years is the best choice.
Why there are errors in Forex - the main reasons
So, we have discussed the main mistakes in Forex, why traders lose money along with the measures that need to be taken in order to understand how to avoid losses in Forex.
Diligent study, market research, careful preparation of trading plans and proper money management can ultimately lead to profitability.
By following these steps, you will significantly improve the chances of making winning trades.
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